First Person: Credit Management for Young Adults

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A key part of personal financial success for young adults is proper use and management of credit. Starting before they turn 18 and are able to obtain credit on their own, young adults need to know how the system works and how to control their use of credit. Too many young adults leave home and are offered thousands of dollars in credit they can’t really afford or apply for credit cards to use as spending money.

Young adults need to learn money management skills early and need to understand that stupid financial mistakes, made early in life, can follow them around for years. Technology allows a multitude of authorized users to gain instant access to credit profiles, so young adults can’t escape the system. Here are some key credit management points to discuss with young adults to help them manage money and succeed in life:

Impact of Bad Credit

Young adults need to know the consequences of bad credit. Bad credit could prevent you from obtaining student loans or other college financing. Bad credit can make it impossible to rent an apartment, even if you can afford the rent. Bad credit can make is impossible or expensive to get car insurance, as insurers now check and base rates on credit scores. Bad credit can cost money each month, as you may be forced to get higher priced utility options like pre-paid cellular. And through higher interest rates, bad credit can cost thousands of dollars in wasted money especially on large purchases like houses and cars, compared to the same purchases by someone with good credit.

Pay Bills on Time

The two easy to discover secrets to keeping good credit are to limit the amount of credit you take on and pay your bills on time. The easiest one is paying your bills on time. Set up a system, whether it’s a filing system or a calendar where you write the due dates on it, figure out a way to make sure bills are paid. Many bills can now be set to be paid automatically each month from your checking account or ATM card. Do not set bills to be paid from credit cards, as this can lead to deeper debt.

Understand the System

Your credit report is a detailed report of all your credit cards, car payments even utility payments. Your credit score, is a number, between 500 and 800 that takes numerous factors into account, including your history of payments, the amount of credit you have available and the amount of credit you use. A good credit score is considered 700 or greater, and “top tier” is usually considered 740 and higher. This top tier allows you to get the lowest interest rates.

Use Credit as A Tool

Credit is not free money and young adults need to understand that. Credit should not be used as a way to buy things beyond your financial means. The only exceptions to this are a house and a reasonably priced used car, if it is needed for transportation. The basic rule of living within your means always applies. If you don’t have the cash to pay for it, you can’t afford it.

Monitor Credit

Young people need to make sure they are aware of their credit reports and scores and know how to obtain them. Young adults should know to never sign up for a credit monitoring service, they are a waste of money. Federal law (FCRA) provides all consumers with a free copy of their credit report each year (upon request) and a free copy whenever they suspect fraud or erroneous information. The Federal Trade Commission has a great website young adults can access to get complete credit use information, including direct access to their free credit reports via the government’s official website, annualcreditreport.com, the only official site run by the government. Young adults need to know to react immediately to any negative item that has or may appear on their credit report and to dispute it immediately.

Teach by Example

Make sure your own credit profile is strong and even if you had past problems, make positive changes to demonstrate your. Also be sure to live within your means and follow the guidelines of positive credit usage.

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